{"id":1596,"date":"2012-02-27T06:48:00","date_gmt":"2012-02-27T11:48:00","guid":{"rendered":"https:\/\/actec.matrixdev.net\/?post_type=capital-letter&p=1596"},"modified":"2024-01-07T18:37:05","modified_gmt":"2024-01-07T23:37:05","slug":"the-administrations-fiscal-2013-budget-proposals","status":"publish","type":"capital-letter","link":"https:\/\/actec.matrixdev.net\/capital-letter\/the-administrations-fiscal-2013-budget-proposals\/","title":{"rendered":"The Administration\u2019s Fiscal 2013 Budget Proposals"},"content":{"rendered":"\n

Treasury\u2019s \u201cGreenbook\u201d gets attention by proposing broad changes to the estate tax treatment of grantor trusts.<\/strong><\/em>
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Dear Readers Who Follow Washington Developments:<\/p>\n\n\n\n

In connection with the rollout of the Administration\u2019s proposed fiscal 2013 budget on February 13, 2012, the Treasury Department released its General Explanations of the Administration\u2019s Fiscal Year 2013 Revenue Proposals<\/a> (popularly referred to as the \u201cGreenbook<\/a>\u201d).  Most of its proposals are carried over from previous years with little or no change, but a proposal to \u201ccoordinate certain income and transfer tax rules applicable to grantor trusts\u201d has generated lots of attention and will renew the reexamination of a decades-old disconnect.<\/p>\n\n\n\n

PROPOSALS CARRIED OVER FROM PREVIOUS YEARS<\/strong><\/p>\n\n\n\n

Return to 2009 Rates and Exemptions, with Permanent Portability<\/p>\n\n\n\n

Consistently with the Obama Administration\u2019s previous budget proposals, the Greenbook<\/a> proposes, effective January 1, 2013, to return the estate, gift, and GST taxes to their 2009 levels, which, as in past years, the Greenbook<\/a> quixotically calls \u201cparameters.\u201d  That would mean an essentially flat 45 percent estate and GST tax above a $3.5 million exemption and an almost flat gift tax (starting at 41 percent) for cumulative taxable gifts over an exemption of $1 million.<\/p>\n\n\n\n

The Greenbook<\/a> points out that before 2002 the top tax rate was 55 percent, plus a 5 percent surcharge on the amount of the taxable estate between approximately $10 million and $17.2 million, with an exclusion of $675,000 that was scheduled to rise to $1 million by 2006.  It views the 2010 Tax Act<\/a> as \u201ca substantial tax cut to the most affluent taxpayers that we cannot afford to continue\u201d and concludes that \u201c[w]e need a permanent estate tax law that provides certainty to taxpayers, is fair, and raises an appropriate amount of revenue.\u201d  Nevertheless, the revenue projections assume that 2012 law is permanent for purposes of calculating the budget \u201cbaseline,\u201d with the result that the proposed return to 2009 law is estimated to raise federal revenues by $119 billion over the fiscal years 2013 through 2022, which, as far as the estate tax is concerned, corresponds roughly to decedents dying in calendar 2012 through 2021.  In fact, these tax increases effective January 1, 2013, are projected to increase revenue by $103 million for fiscal 2012, which ends September 30, 2012.<\/p>\n\n\n\n

The Greenbook<\/a> also repeats last year\u2019s proposal that the portability provisions enacted in December 2010 be made permanent, albeit at an exemption level of $3.5 million for the estate tax and $1 million for the gift tax.  As described elsewhere, for example in ACTEC\u2019s Comments on Portability Guidance, the limitations Congress imposed on portability in the 2010 Tax Act<\/a> have presented a number of challenges regarding the coordination of the gift tax and the estate tax for purposes of portability.  Customizing portability to the revived 2009 dual gift tax-estate tax exemption would present still further challenges, but perhaps also an opportunity for Treasury and Congress to examine ways to simplify the operation of portability across-the-board.<\/p>\n\n\n\n

\u201cRequire Consistency in Value for Transfer and Income Tax Purposes\u201d<\/p>\n\n\n\n

This proposal would require the value of property transferred at death or by gift that is used to compute the recipient\u2019s basis to be the value that is finally determined for estate or gift tax purposes.  It includes a few refinements of the similar proposals in recent years, including acknowledgment of the allocations of basis increases on Form 8939 by the executors of decedents who died in 2010, even though the proposal would apply only to transfers on or after the date of enactment.<\/p>\n\n\n\n

Ever since the first appearance of this proposal in the 2009 Greenbook and its analysis in a 2009 Joint Committee on Taxation publication, discussed in Capital Letter Number 18<\/a>, there has been cause for concern that the implementing legislation might actually limit basis to the amount reported<\/em> on an estate tax return, even if that value is increased in an estate tax audit.  Therefore, Capital Letters has monitored the glimpses of the statutory language that we have seen in section 6<\/a> of the \u201cResponsible Estate Tax Act<\/a>,\u201d introduced by Senators Sanders (I-VT)<\/a>, Whitehouse (D-RI)<\/a>, Harkin (D-IA), Brown (D-OH)<\/a>, and Franken (D-MN) as S. 3533<\/a> on June 24, 2010, and by Rep. Linda Sanchez (D-CA)<\/a> as H.R. 5764<\/a> on July 15, 2010; by section 309 of the \u201cMiddle Class Tax Cut Act of 2010\u201d offered as an amendment to pending tax legislation on December 2, 2010, by Finance Committee Chairman Max Baucus (D-MT); and in section 5 of the \u201cSensible Estate Tax Act of 2011,\u201d H.R. 3467, introduced on November 17, 2011, by Congressman Jim McDermott (D-WA).<\/p>\n\n\n\n

The November 2011 version of Congressman McDermott\u2019s bill (H.R. 3467) is most significant, because it is the most recent and because it clearly addresses and dispels the concern about the effect of an estate tax audit on basis.  Under this bill, new sections 1014(f)(1) and 1015(f)(1) would direct that the value subsequently used to determine basis be the value \u201cas finally determined\u201d for estate or gift tax purposes.  The only exception, in new sections 1014(f)(2)9 and 1015(f)(2), would require use of the value initially reported to the heir or donee only<\/em> if \u201cthe final value \u2026 has not been determined.\u201d  That could influence the timing of sales while the estate tax audit is still open, but, essentially limited in time to that scenario, it seems to be a reasonable compromise.<\/p>\n\n\n\n

H.R. 3467, by the way, includes other helpful technical provisions.  Section 2(c) would prevent the notorious \u201cclaw back\u201d that might otherwise recapture benefits of today\u2019s large gift tax exemption if the donor dies when the estate tax exemption is lower.  Section 2(d) would correct a divergence between the statutory portability language and Example 3 in the 2010 legislative history, by confirming that the legislative history reflected true congressional intent.  As a significant tax increase with an exemption of about $1.3 million and a 55 percent top rate, H.R. 3467 has no future in the current Republican-led House of Representatives.  But this evidence of ahead-of-the-curve attention to technical issues at the staff level is a source of reassurance about any estate tax legislation Congress might entertain in 2012 or early 2013.<\/p>\n\n\n\n

The consistency proposal in the Greenbook<\/a> is estimated to increase revenues by $2 billion over ten years.<\/p>\n\n\n\n

\u201cModify Rules on Valuation Discounts\u201d<\/p>\n\n\n\n

This proposal to expand regulatory authority under section 2704(b)(4) was first described in\u00a0Capital Letter Number 17<\/a>\u00a0and is unchanged from recent years.\u00a0 Treasury estimates that it would increase revenue over ten years by $18.079 billion, an estimate that has been declining slightly each year since this proposal first appeared in the 2009 Greenbook.\u00a0 But the proposal is not likely to be viewed as a revenue-raiser by congressional estimators, because its effect depends entirely on regulations that have not yet been promulgated.\u00a0 Possibly for that reason, recent statutory proposals, including Congressman McDermott\u2019s H.R. 3467, do not adopt this proposal, but merely reproduce aggregation and look-through valuation rules that date back to the Clinton Administration or arguably to \u201cTax Reform for Fairness, Simplicity, and Economic Growth\u201d (popularly called \u201cTreasury I\u201d) published on November 27, 1984, by the Reagan Administration.<\/p>\n\n\n\n

\u201cRequire a Minimum Term for Grantor Retained Annuity Trusts (GRATs)\u201d<\/p>\n\n\n\n

Another perennial Greenbook<\/a> entry, which was actually approved by the House of Representatives three times in 2010, this proposal to amend section 2702 to require a ten-year minimum term for GRATs has one change from last year, an additional requirement of a maximum<\/em> term equal to the life expectancy of the annuitant plus ten years. That would limit the use of very long-term \u201cWalton<\/em>-style\u201d GRATs with a low annual payout that would result in a reduced inclusion in the gross estate under Reg. \u00a7 20.2036-1(c)(2)(i). Like previous Greenbooks, however, while the 2012 Greenbook<\/a> would require the remainder interest in the GRAT to have \u201ca value greater than zero at the time the interest is created,\u201d it confirms that \u201ca minimum term would not prevent \u2018zeroing-out\u2019 the gift tax value of the remainder interest.\u201d Obviously near<\/em>-zeroing-out is what is meant.<\/p>\n\n\n\n

This proposal is estimated to increase revenues by $3? billion over ten years, slightly up from estimates in past years.<\/p>\n\n\n\n

\u201cLimit Duration of Generation-Skipping Transfer (GST) Tax Exemption\u201d<\/p>\n\n\n\n

This proposal to sunset the allocation of GST exemptions after 90 years is not substantively changed from the 2011 Greenbook, where it first appeared.  Not surprisingly, it is said to have a \u201cnegligible revenue effect\u201d in the first ten years.<\/p>\n\n\n\n

NEW PROPOSALS THIS YEAR<\/p>\n\n\n\n

\u201cCoordinate Certain Income and Transfer Tax Rules Applicable to Grantor Trusts\u201d<\/p>\n\n\n\n

Most of the rules treating a grantor as the \u201cowner\u201d of a trust were crafted in the 1930s and 1940s to curb the shifting of taxable income to taxpayers in lower income tax brackets, even to the spouses of grantors in common law states before 1948 when joint income tax returns were introduced.  At least since the promulgation of Rev. Rul. 85-13, 1985-1 C.B. 184, in which the Service held that an apparent sale between a grantor trust and its grantor would not be regarded as a sale for income tax purposes, the disconnect between the grantor trust rules and the gift and estate tax rules has inspired considerable e<\/u><\/strong>ffective planning with so-called \u201cde<\/u><\/strong>fective\u201d grantor trusts.  It is hard to argue, for example, that the grantor\u2019s payment of income tax on someone else\u2019s income is not economically equivalent to a gift, but, because the tax is the grantor\u2019s own obligation under the grantor trust rules, it escapes gift tax.  And sales to grantor trusts are often viewed as economically equivalent \u2013 or superior \u2013 to GRATs, but without the policing of sections 2702 and 2036 or the \u201cETIP\u201d restrictions of section 2642(f) on allocating GST exemption.<\/p>\n\n\n\n

So it is not surprising that there is interest from time to time in closing the gap between the two sets of tax rules.  This has been true even as recent developments have seemed to actually ratify and validate the widespread use of grantor trusts in estate planning, including<\/p>\n\n\n\n